FRM Glossary · Part I · Investment

Sortino Ratio

Like the Sharpe ratio, but uses downside deviation as the denominator — penalising only harmful volatility.

In more detail

Sortino Ratio = (R_p − R_target) / σ_d, where σ_d is the standard deviation of returns below the target (or MAR). The Sortino ratio avoids penalising upside volatility and is widely used for hedge-fund and absolute-return strategies.